Skip to main content
SpringerLink
Log in

The long-run performance of initial public offerings and its determinants: the case of China

  • Original Paper
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

Existing research finds poor long-run performance of Initial Public Offerings (IPOs), particularly in the US. Using company IPO data from China’s Shanghai Stock Exchange, we find comparable levels of underperformance. In line with US results, initial overoptimism and the size of the offer are important explanatory factors for this underperformance. Additional variables include the earnings per share prior to listing, the decision to switch investment banks at the time of issue and whether the firm issues shares that can be purchased by foreign investors. These factors suggest that firms in China are able to manipulate the issue process. In the context of Chinese economic reforms, of particular note is the positive performance impact of the government shareholding after issue, which supports a signal argument in relation to continuing government support. As a result, we provide an interesting insight into the influence of the regulatory environment and economic transition on the long-run performance of IPOs in China.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

Notes

  1. There are consistent findings of a link between initial returns and long-run underperformance (Ibbotson (1975), and more recently Rajan and Servaes (2003), Purnanandam and Swaminathan (2004) and Ljungqvist et al. (2006)).

  2. Guo (2005) argues that IPO underpricing encourages investors to gather costly information.

  3. See, for example, Chen et al. (2000) and Chan et al. (2004).

  4. However, Wong et al. (2006) argue that the proportion of floating equity has no effect on the cross-section of stock returns in China.

  5. An additional feature of the process is the long delay between the offering and listing, especially during the early 1990s, although Gu (2003) shows that this lag has reduced significantly, averaging 35 days in 2000 compared to approximately 200 four years earlier. He shows that the initial return is positively related to this lag, particularly during the first half of the 1990s. See also Chen et al. (2000) and Chan et al. (2004).

  6. A buy-and-hold approach increases the likelihood that the return distribution has a skewed trend. As a result, Lyon et al. (1999) propose this skewness-adjusted test statistic.

  7. As an additional robustness check, we calculate wealth relatives as proposed by Ritter (1991). Wealth relatives (WR) are the ratio of the end-of-period wealth from holding a portfolio of issuers to the end-of-period wealth from holding the market benchmark. A wealth relative less than 1 indicates underperformance relative to the benchmark portfolio. We obtain a three-year wealth relative of 0.725, consistent with the CAR and BHAR estimates.

  8. Existing evidence finds that the size of the initial return is related to proxies of the supply of, and demand for, the stock. In results that we do not report, we find that the initial return is significantly negatively related to the size of the offer (see also Chan et al. 2004), the probability of being successful in the allocation and the earnings per share prior to listing.

  9. Initially the allocation of shares was in the form of a lottery. More recently an auction has been used, although investors continue to make applications for stock at a given price.

  10. A recent survey by Graham et al. (2005) finds that ‘most earnings management is now achieved via real actions as opposed to accounting manipulations’.

  11. Additionally, manipulation can take the form of subsidies and favourable tax rates offered by local government to help firms meet the profitability requirement of an IPO.

  12. Chen et al. (2000) find evidence of this positive relation in China.

  13. Legal person shares are owned by other SOEs that contribute capital to the listing firm prior to its IPO to help fund pre-IPO restructuring.

  14. Including IPOs for 2002 gives an average initial return of 138%.

References

  • Aharony J, Lee J, Wong TJ (2000) Financial Packaging of IPO Firms in China. J Account Res 38(1)

  • Barber B, Lyon J (1997) Detecting abnormal operating performance: the empirical power and specification of test statistics. J Financ Econ 43:341–372

    Article  Google Scholar 

  • Brav A, Gompers PA (1997) Myth or reality? The long-run performance of initial public offerings: evidence from venture and non-venture capital-backed companies. J Financ 52:1791–1821

    Article  Google Scholar 

  • Boycko M, Shleifer A, Vishny R (1996) A theory of privatisation. Econ J 106:309–319

    Article  Google Scholar 

  • Carter RB, Dark FH, Singh AK (1998) Underwriter reputation, initial returns and the long-run performance of IPO stocks. J Financ 53:285–311

    Article  Google Scholar 

  • Chan K, Wang JB, Wei KC (2004) Underpricing and long-term performance of IPOs in China. J Corp Financ 10:409–430

    Article  Google Scholar 

  • Chen G, Firth M, Kim J (2000) The post-issue market performance of initial public offerings in China’s new stock markets. Rev Quant Financ Account 14:319–339

    Article  Google Scholar 

  • Das S, Guo R, Zhang H (2006) Analysts’ selective coverage and subsequent performance of newly public firms. J Financ 61:1159–1189

    Article  Google Scholar 

  • Fama EF (1998) Market efficiency, long-term returns and behavioral finance. J Financ Econ 49:283–306

    Article  Google Scholar 

  • Fama E, French K (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33:3–56

    Article  Google Scholar 

  • Green S, (2003) China’s stock market: eight myths and some reasons to be optimistic. Working paper, the royal institute of international affairs, Cambridge University

  • Graham J, Harvey C, Rajgopal S (2005) The economic implications of corporate financial reporting. J Account Econ 40:3–73

    Article  Google Scholar 

  • Gu A (2003) A trend towards being normal: the ‘A’ share experience of the shanghai stock exchange. Appl Financ Econ 13:379–385

    Article  Google Scholar 

  • Guo R (2005) Information collection and IPO underpricing. Rev Quant Financ Account 25:5–19

    Article  Google Scholar 

  • Hanley K (1993) The Underpricing of initial public offerings and the partial adjustment phenomenon. J Financ Econ 34:213–250

    Google Scholar 

  • Healy P, Wahlen J (1999) A review of the earnings management literature and its implications for standard setting. Account Horizon 13:365–383

    Article  Google Scholar 

  • Ibbotson RG (1975) “Price performance of common stock new issues. J Financ Econ 3:235–272

    Article  Google Scholar 

  • Ibbotson RG, Sindelar J, Ritter JR (1988) Initial public offerings. J Appl Corp Financ 1:37–45

    Article  Google Scholar 

  • Jensen M (1986) Agency costs of free cash flow, corporate finance and takeovers. Am Econ Rev 76:323–329

    Google Scholar 

  • Kothari S, Warner J (1997) Measuring long-horizon security price performance. J Financ Econ 43:301–339

    Article  Google Scholar 

  • Liu T (2003) Investment without risk: an investigation into IPO underpricing in China China Project Report, No. 4

  • Liu J, Nissim D, Thomas J (2002) Equity valuation using multiples. J Account Res 40:135–172

    Article  Google Scholar 

  • Liu G, Cong S (2002) Value creation versus profitability—How do they differ? The value theory and its application to the chinese quoted companies, Economic Research (Jingji Yangjiu), June, Chinese Academy of Social Science

  • Liu G, Sun P (2006) The rise and fall of China’s corporate Dragon: Kelon and its old and new owners. In: Mallin C (ed) (forthcoming), Edward Elgar

  • Liu G, Sun P, Woo W (2005) Chinese-style privatisation: motives and constraints. In: Green S, Liu G (eds) Exit the dragon, Blackwell

  • Loughran T, Ritter JR (1995) The new issue puzzle. J Financ 50:23–51

    Article  Google Scholar 

  • Loughran T, Ritter JR (2000) Uniformly least powerful tests of market efficiency. J Financ Econ 55:361–389

    Article  Google Scholar 

  • Ljungqvist A, Nanda V, Singh R (2006) Hot markets, Investor Sentiment and IPO Pricing. J Bus 79:1667

    Article  Google Scholar 

  • Lyon J, Barber B, Tsai C-L (1999) Improved methods for tests of long-run abnormal stock returns. J Financ 54:165–201

    Article  Google Scholar 

  • Michaely R, Shaw W (1994) The pricing of initial public offerings: tests of adverse selection and signaling theories. Rev Financ Stud 7:279–319

    Article  Google Scholar 

  • Michaely R, Womack K, (1999) Conflict of interest and the credibility of underwriter analyst recommendations. Rev Financ Stud 12:653–686

    Article  Google Scholar 

  • Mikkelson W, Partch M, Shah K (1997) Ownership and operating performance of companies that go public. J Financ Econ 44:281–307

    Article  Google Scholar 

  • Mitchell M, Stafford E (2000) Managerial decisions and long-term stock price performance. J Bus 73:287–329

    Article  Google Scholar 

  • Mok H, Hui Y (1998) Underpricing and aftermarket performance of IPOs in Shanghai, China. Pac Basin Financ J 6:453–474

    Article  Google Scholar 

  • Purnanandam A, Swaminathan B (2004) Are IPOs really underpriced? Rev Financ Stud 17:811–848

    Article  Google Scholar 

  • Rajan R, Servaes H, (1997) Analyst following of initial public offerings. J Financ 52:507–529

    Article  Google Scholar 

  • Rajan R, Servaes H (2003) The effect of market conditions on initial public offerings. In: McCahery J, Renneboog L (eds) Venture capital contracting and the valuation of high-tech firms, Oxford University Press

  • Ritter JR, (1991) The long-run performance of initial public offerings. J Financ 46:3–27

    Article  Google Scholar 

  • Ritter JR, Welch I (2002) A review of IPO activity, pricing and allocation. J Financ 57:1795–1828

    Article  Google Scholar 

  • Roychowdhury S (2006) Earnings management through real activities manipulation. J Account Econ 42:335–370

    Article  Google Scholar 

  • Teoh S, Welch I, Wong T, (1998) Earnings management and the long-run market performance of initial public offerings. J Financ 53:1935–1974

    Article  Google Scholar 

  • Teoh S, Wong T, Rao G (1998) Are earnings during initial public offerings opportunistic? Rev Account Stud

  • Tian G (2000) State shareholding and the value of Chinese Firms, Working Paper, London Business School

  • Wong K, Tan R, Liu W (2006) The cross-section of stock returns on the Shanghai stock exchange. Rev Quant Financ Account 26:23–39

    Article  Google Scholar 

  • Yang J (2003) Market segmentation and information asymmetry in Chinese Stock Markets: a VAR analysis. Financ Rev 38, 591–609

    Google Scholar 

  • Yi JH (2001) Pre-offering earnings and the long-run performance of IPOs. Int Rev Financ Anal 10:53–67

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Barclays Capital Ltd, London, UK

    Xiaoqiong Cai

  2. Economics & Finance, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK

    Guy S. Liu & Bryan Mase

Authors
  1. Xiaoqiong Cai
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Guy S. Liu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Bryan Mase
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Bryan Mase.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Cai, X., Liu, G.S. & Mase, B. The long-run performance of initial public offerings and its determinants: the case of China. Rev Quant Finan Acc 30, 419–432 (2008). https://doi.org/10.1007/s11156-007-0064-5

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-007-0064-5

Keywords

JEL Classifications

Search

Navigation